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INDIVIDUALS.—

REGULATION. (a) A citizen of the United States who resides in Porto Rico, and a citizen of Porto Rico who resides in the United States are taxed in both places, but the income tax in the United States is credited with the amount of any income, war profits and excess profits taxes paid in Porto Rico. .... (b) A resident of the United States who is not a citizen of Porto Rico is taxable in Porto Rico as a nonresident alien individual on any income derived from sources within Porto Rico, but the income tax in the United States is credited with the tax paid in Porto Rico. (c) A resident of Porto Rico who is not a citizen of the United States is taxable in the United States as a nonresident alien individual on any income derived from sources within the United States, and receives no credit. . ... The same principles apply in the case of the Philippine Islands. (Art. 1132.)

CORPORATIONS.

REGULATION. (a) A United States corporation which derives income from sources within Porto Rico, (b) a Porto Rico corporation which derives income from sources within the United States, and (c) a corporation of a foreign country which derives income both from sources within Porto Rico and from sources within the United States, are all taxed in both places. In the case of the United States corporation the income, war profits and excess profits taxes in the United States are credited with the amount of any income, war profits and excess profits taxes paid in Porto Rico. In the case of the Porto Rico corporation there is no such credit. .... The corporation of the foreign country deriving income from both places is subject to no double taxation so far as the United States and Porto Rico are concerned. For the purpose of withholding a Porto Rico corporation is a foreign corporation. ..... The same principles apply in the case of the Philippine Islands. (Art. 1133.)

[Former Procedure]

Under the 1913 law non-resident alien individuals were taxable "on income from property owned or business carried on in the United States." The normal tax rate was I per cent, and the surtax rates were the same as in the case of citizens, or residents.

Royalties were considered taxable income; but, under a ruling of the Treasury based on an opinion of the Attorney-General, income from stocks and bonds of domestic corporations was not taxable.

The specific exemption allowed in the case of citizens and residents was not allowed to non-resident alien individuals. Responsible heads, agents or representatives of non-resident aliens in charge of property or business in the United States were required to make return for their non-resident principals.

[Former Procedure-Continued]

In T. D. 2313, dated March 21, 1916, based on the decision of the Supreme Court of the United States in Brushaber v. Union Pacific, it was ruled that interest on bonds and dividends on stock were taxable income, and that non-resident aliens were subject to the liabilities and requirements of all administrative, special and general provisions of the law. T. D. 2324, dated April 24, 1916, provided for withholding from July 1, 1916; and T. D. 2317, dated April 4, 1916, provided that the individual liability of non-resident aliens for tax would be effective as of January 1, 1916.

Foreign corporations were taxable upon the net income from business transacted and capital invested in the United States. Buying and selling through agents was held to be transacting business within the meaning of the law. There was no provision for withholding in the case of corporations.

Corporations were required to file returns and they were allowed to take as deductions the deductions allowed to domestic corporations, but only in the proportion that the gross income from sources within the United States bore to the gross income from all sources. There was an exception to this in the case of interest on indebtedness, which was subject to the further restriction that it could not be deducted on an amount of indebtedness in excess of one-half the sum of the interest-bearing indebtedness and the paid-up capital, in the ratio that gross income from the United States was to gross income from all sources.

Under the 1916 law non-resident alien individuals and foreign corporations were taxable on the entire net income from all sources within the United States. The normal tax in the case of individuals and the corporation tax were raised from I per cent to 2 per cent. Individuals were subject to the same increased surtaxes as citizens or residents. Dividends were excluded from taxation for the purpose of the normal tax, and deductions were allowed in so far as they related to income from sources within the United States, except in the case of interest on indebtedness. In such case individuals were allowed a deduction in the ratio of gross income within the United States to gross income from all sources, and a corporation was allowed a deduction on an amount of indebtedness equal to the sum of its capital plus one-half its interestbearing indebtedness, in the ratio which its gross income from sources within the United States bore to its total gross income.

Individuals were allowed a credit for tax withheld, in addition to the credit for dividends, and were also allowed the same specific exemption as citizens, but only by filing a return. Return was not required if the net income was under $3,000 but it could be filed to get the benefit of a refund where tax had been withheld in excess of the amount due.

Foreign corporations were subject to withholding on dividends

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[Former Procedure—Continued] on stock of domestic corporations, but where they were only record owners, actual ownership could be disclosed by filing form 1087.

The 1917 law imposed an additional normal tax of 2 per cent on citizens and residents but not upon non-resident alien individuals, who remained liable only for the normal tax of 2 per cent imposed by the act of 1916, plus the surtaxes under both acts on net income in excess of $5,000. The specific exemption was, however, eliminated as to nonresident alien individuals, and they were taxable for normal tax on the amount of net income after deductions, which were allowed only if a return was filed.

The normal tax was to be withheld on all fixed and determinable income subject to the tax, except that derived from dividends of domestic corporations or from interest on obligations of the United States. In the case of corporations, bank deposits were not subject to withholding, and withholding was required only in the case of interest on bonds and similar obligations of domestic corporations and dividends on the stock of domestic corporations.

Foreign corporations were allowed a credit for dividends of domestic corporations for the purpose of the additional 4 per cent tax, and thus withholding was only to the extent of 2 per cent. In the case of interest on bonds, however, a tax of 6 per cent had to be withheld from foreign corporations and 2 per cent from non-resident alien individuals. Foreign partnerships were subject to excess profits tax, but were not subject to income tax, although every foreign partnership deriving a net income of $3,000 or over from sources within the United States was required to make a return. Other provisions of the law applicable to citizens and residents were also applicable to all non-resident aliens. Under the Revenue Act of 1918 withholding is not required on dividends, and amounts withheld on such payments during 1918 were released and paid over to those from whom they were withheld.

FIDUCIARIES

The sections of the 1918 law relating to fiduciaries have clarified rather than changed the provisions of the 1916 and 1917 laws. No doubt need now exist as to what income of the estate must be returned by the beneficiary; and a new provision requires all income collected for an infant to be included in the return that the guardian must make for him. The provision permitting returns to be made on the basis of an accounting period other than a calendar year will be appreciated by many fiduciaries.

A fiduciary is one who occupies a position of peculiar confidence toward others. As a general rule, a fiduciary has legal title to the property and those for whom he acts enjoy the beneficial title. The law defines a fiduciary as follows:

Fiduciary defined.

Law. Section 200. . . . . The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate,

REGULATION. "Fiduciary" is a term which applies to all persons that occupy. positions of peculiar confidence toward others, such as trustees, executors and administrators, and a fiduciary for income tax purposes is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest,

[Former Procedure] Under former laws all fiduciary returns had to be made on the basis of a calendar year, except that returns could be made immediately upon the settlement of an estate.

?[Former Procedure] The act of 1913 included agents in the definition of fiduciaries, but as this clearly did not mean the ordinary agent or attorney, and the Treasury so held, the word was omitted from the 1916 law.

Under former acts fiduciaries were considered the agents having the receipt, custody, control and disposal of non-resident alien beneficiaries' income, and as such were required to make return for such beneficiaries, and to pay any and all tax found by such return to be due. This is not required under the new law.

or receives and controls income of another as in the case of receivers. A committee of the property of an incompetent person is a fiduciary. .... (Art. 1521.)

FIDUCIARY DISTINGUISHED FROM AGENT.

REGULATION. There may be a: fiduciary relationship between an agent and a principal, but the word “agent" does not denote a fiduciary. A fiduciary relationship can not be created by a power of attorney. An agent having entire charge of property, with authority to effect and execute leases with tenants entirely on his own responsibility and without consulting his principal, merely turning over the net profits from the property periodically to his principal by virtue of authority conferred upon him by a power of attorney, is not a fiduciary within the meaning of the statute. In cases where no legal trust has been created in the estate controlled by the agent and attorney the liability to make a return rests with the principal. (Art. 1522.)

ASSOCIATION DISTINGUISHED FROM TRUST.

REGULATION. Where trustees hold real estate subject to a lease and collect the rents, doing no business other than distributing the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees and of consenting to a modification of the terms of the trust, no association exists and the cestuis que trust are liable to tax as beneficiaries of a trust the income of which is to be distributed periodically, whether or not at regular intervals. But in such a trust if the trustees pursuant to the terms thereof have the right to hold the income for future distribution, the net income is taxed to the trustees instead of to the beneficiaries. .... If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute.3 (Art. 1504.)

How Estates and Trusts Are Taxed

Rates of tax.

Law. Section 219. (a) That the tax4 imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including

As to Massachusetts trusts, see page 93, footnote 32.

"The tax referred to is the normal tax and surtax imposed in the case of individuals. (See Chapter VI.)

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